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Focus
Media (NASDAQ: FMCN) Vice President Ji Hairong vehemently denied
charges leveled by US short-seller Muddy Waters a “strong sell”
on the company. The Muddy Waters report, released today, caused the stock to
tumble by about 40% by the end of trading.

It’s still too early to tell whether Focus Media will be more
like Sino-Forest or like Spreadtrum, but Focus Media’s response
is is extremely direct and detailed. Here are Vice President Ji
Hairong’s responses to an interview with Xueqiu.com’s Chinese investors, Hairong refuted a number of
Muddy Waters’ allegations:

Allegation #1: Muddy Waters believes that many
of the items we discuss in this report are symptomatic of a
highly troubled enterprise that is run solely for the benefit of
insiders… In the public market, insiders have sold at least $1.7
billion of shares since FMCN went public.

Response #1: “Muddy Waters’ alleged ‘insider
trading’ is actually our investors like Softbank, IDG, Goldman,
add Dinghui and the leaders of two companies we acquired, Target
Media and Frame Media. For them to sell is perfectly normal. Our
CEO Jason Jiang hasn’t sold any stock since 2006, and increased
his holdings two years ago.”

Allegation #2: FMCN materially overstates the
number of LCD screens in its core business. FMCN’s SEC
filings state that it has 178,382 screens, while according to its
media kit, it has fewer than 120,000, a 50% overstatement.
It actually has fewer than 30,000 screens in Tier I cities,
despite claiming to have in excess of 50,000 Tier I screens.

In first tier cities, we have 29,707 LCD screens and 16,118
posters, in 2nd tier 56301 LCD screens and 45,979 posters, and in
third-fourth tier cities 30018 LCD screens and 259 posters.
That’s our total of 178,382.”

Allegation #3: Six mobile handset advertising
companies that FMCN never actually acquired. FMCN claimed to
acquire these companies between 3/1/2007 and 10/1/2007 for
total consideration of $46.3 million.1314 FMCN then claimed
to impair these companies to zero in 2008, and return them
to their original shareholders. However, the acquisitions
(and obviously disposals) never occurred. The fact that
these acquisitions never occurred has important implications
for the whereabouts of the cash FMCN claimed to pay, as well
as the integrity of FMCN’s reported results.

Response #3: “These companies were principally
in the mobile advertising business, which in China require
related licenses. Licenses are one of these companies’ key
assets. After acquiring these companies, Focus placed these
companies under one roof in order to integrate them, but in order
to keep 6 licenses in China, we always kept the companies. We
haven’t changed the shareholders, our foreign companies still own
them via the VIE structure.”